Sec. 6050I Crypto Crackdown (Part 1): 15 Days or Felony? $250K Fines

How the new IRS 6050I law affects crypto

The IRS 6050I is the biggest regulatory gotcha in the history of crypto.

I’ve written numerous times about multiple impossible reporting requirements, such as the digital asset broker reporting proposed regulations, including The IRS Tripled Your Crypto Tax Prep Cost (The IRS Kills Crypto Part 3), which includes links to Part 1 and Part 2. I suppose I could also call this, “The IRS Kills Crypto Part 4.”

With Sec 6050I, IRS makes crypto reporting impossible again

Guess what? You ain’t seen nothin’ yet when it comes to impossible until you’ve seen the reporting requirements of Sec 6050I where digital assets are deemed to be “cash” for reporting purposes. I’ve talked about the disturbing nature of Sec 6050I in the past, and it’s recently been in the news again at the beginning of 2024 when the rules were supposed to kick in.

I thought it was time to revisit why 6050I is the single most troublesome crypto regulation to date. There are two main reasons I will discuss in more detail:

1. U.S. commerce will AVOID using digital assets and revert to USD.
2. The regs have the harshest penalties and the shortest timeframe for non-compliance. 

Don't let tax season drain your profits. 
Avoid 7 Costly Crypto Tax Pitfalls

How 6050I changes crypto into cash

First, let’s get clear on how 6050I came into the picture. (BTW it’s not 60501 like 60,501, it’s 6050 “I” but depending on the font the whole thing looks like a number.) When the Infrastructure and Jobs Act was passed in November 2021, just a few words changed the destiny of crypto as described in articles like New Taxation Provisions on Digital Assets Hidden in the Infrastructure Bill. Indeed, I first heard about this at a regulatory panel at NFT.NYC in October 2021 before the bill was signed. Panelists were discussing how the “cash definition change” was cleverly tucked into the bill at the last minute.

BTW it’s not 60501 like 60,501, it’s 6050 “I” but depending on the font,
the whole thing looks like a number.

Here is the change, “Section 80603(b)(3) of the Infrastructure Act amended section 6050I(d) to expand the definition of the term “cash” to include any digital asset as defined in section 6045(g)(3)(D).”

Therefore:

Digital assets = Cash

IRS Sec 6050I requires business transactions greater than $10,000 in cash to be reported on Form 8300. It might be simpler to think of this as a Form 8300 problem. This has already been around for decades, but the new sneaky definition of cash means this applies to crypto. 

Form 8300 is a decades-old filing requirement

Here is the formal Sec 6050I description:

“Under section 6050I(a), any person (the recipient) engaged in a trade or business who, in the course of that trade or business, receives cash in excess of $10,000 in one transaction (or two or more related transactions) must file an information return reporting the receipt of cash.”

“The regulations require that the return must be filed on Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, within 15 days of the receipt of cash and report specified information. See section 1.6050I-1(a) and (e). Section 6050I also requires persons required to file Form 8300 to furnish an annual written statement to each payer whose name is required to be set forth on the Form 8300.” 

The insanity of Form 8300 

If you’re wondering how this is going to kill U.S. commerce, then just look at Form 8300 and Form 8300 Instructions and imagine every transaction (greater than $10,000 or a series of related transactions) getting reported on this form. I’m not even sure the best word to describe this, so I’ll call it ludicrous for now.

There are approximately 400,000 Forms 8300 filed every year, according to the AICPA, in a combination of paper forms and electronic format. Now as Tax Notes points out, the IRS is prepping for eight billion crypto information returns, which is a 20,000x increase in the number or 8300s filed.

Let’s say half of them get filed in paper because of the electronic filing requirement, so the IRS is going to receive four billion paper-based 8300s. Did the IRS do a cost benefit analysis on this? I suspect the paper forms will end up on pallets unprocessed for years. Now I’m at a loss for words.

In a world where digital assets are used predominantly over cash, a business is going to constantly scramble 24/7/365 to file Form 8300s around the clock while living in fear they might make a mistake. There could be full-time positions in the new Form 8300 department just to handle the load.

As the IRS says in the Form 8300 instructions, “The time needed to complete this form will vary depending on individual circumstances. The estimated average time is 30 minutes.” Based on this, a business with 4,000 reporting requirements in a year would need one full-time employee to handle it.

EXAMPLE

Let’s say Bob works at the accounts payable department at XYZ, Inc. and they prefer to pay in USDC. Alice, accounts receivable manager at ABC, Inc., tells Bob he needs to complete Form 8300 every time they have a business transaction throughout the year. (ABC, Inc. sells high-ticket items.)

Bob balks and says, “Why should either of us go through all that extra work. Let’s skip the USDC and XYZ, Inc., and we'll just pay in USD instead.”

U.S. commerce just got killed in the digital asset use case and all the friction that got removed from the rusty old rails of banking are right back with us.

The penalties for Form 8300 are cause for concern

Willful non-compliance with Form 8300 could result in a felony charge. As you can see from the form, you must gather loads of information on your counter party, the person you’re doing business with. Unlike almost every other tax form and informational reporting form, you get 15 days to file the form. Otherwise, you’re already behind the 8-ball and have potentially stepped into quicksand. Payroll tax forms are quarterly and most other forms are annual.

The penalties from least to most severe

1. “You may be subject to penalties if you fail to file a correct and complete Form 8300 on time and you cannot show that the failure was due to reasonable cause.” It’s not clear whether a penalty would be imposed and for what amount between $0 and $25,000 since willful failure starts at $25,000.
2. “A minimum penalty of $25,000 may be imposed if the failure is due to an intentional or willful disregard of the cash reporting requirements.”
3. The most severe penalties are imposed on anyone who commits one of three acts is subject to the following, “These violations may also be subject to criminal prosecution that, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.”

The three acts are:

1. Anyone who causes a business to fail to file a form
2. Anyone who causes a business to file a form with a material omission or material misstatement of fact
3. Anyone who structures attempts to structure transactions to avoid reporting

You can see why it would be easier to avoid using digital assets altogether in U.S. commerce and steer clear of Form 8300 pitfalls. Now add in the nuances of crypto technicalities and crypto events, and the range of pitfalls grows exponentially.

Read more on the unique challenges of reporting digital assets in Sec. 6050I Crypto Crackdown (Part 2).

Remember your goal is always to get a Crypto Bullseye™.

Yours in Crypto, 

Kirk David Phillips, CPA, CMA, CFE, CBP